Individual investors around the world, in particular the younger generation are looking at investments in a more holistic way – and judging them on more than just their financial performance.
Among the issues they might take into account are how a company manages climate change, or whether it is exploiting tax loopholes, which could be detrimental to the firm’s reputation over the long-term.
At the recent Principles for Responsible Investment (PRI) annual conference, the results of a survey of 8,287 adults looked at how those with a corporate or personal pension plan across seven countries – Brazil, South Africa, the US, UK, Australia, Japan and France – viewed environmental, social and governance (ESG) issues.
The YouGov survey also looked at the level of communication these investors had with their pension funds.
Interestingly, the findings showed higher levels of engagement on some issues from those in Brazil and South Africa than in the other countries surveyed. For all those who believe the west generally leads on engagement and integration of ESG issues, this may come as something of a surprise.
When asked whether they felt that how a company manages ESG issues provides insight into how the company is run, 67 per cent of respondents in Brazil and 58 per cent of respondents in South Africa said they strongly agreed with the statement.
By contrast, in the US, UK, France and Japan, less than 25 per cent of respondents strongly agreed with the statement.
The respondents were asked about specific and wide-ranging ESG issues, from the burning of fossil fuels and the use of child labour, to whether chief executives are paid too much and their views on companies exploiting tax loopholes. The findings showed that on these questions, respondents in emerging market countries often had the highest levels of concern.
Some 83 per cent of respondents in Brazil and 77 per cent of respondents in South Africa felt it was very or fairly important that the companies in their pension scheme were not seen to be burning fossil fuels.
Feelings on the importance of companies not exploiting tax loopholes also ran high in Brazil (76 per cent), Australia (76 per cent) and South Africa (78 per cent).
Around three-quarters of respondents in these countries also said it was very, or fairly, important that chief executives were not paid too high a salary – in Brazil the figure was 76 per cent, with 77 per cent agreeing in South Africa and 77 per cent in Australia.
Child labour was found to be the number one issue of concern to beneficiaries in terms of the companies in the portfolio that might be involved in this practice.
This issue ranked highest in Brazil (86 per cent), South Africa (88 per cent) and Australia (88 per cent) with the overwhelming majority of respondents.
Respondents to the survey were also asked about the level of communication they had with their pension funds and whether they felt fund managers listened to their concerns.
Only 7 per cent of respondents in the UK and 3 per cent of those in Japan said their fund manager responded to queries in a timely fashion. This compared with 30 per cent in Brazil and 28 per cent in both Australia and South Africa.
If engagement is the key, the UK might also have another kind of problem. In all the countries except the UK, at least 25 per cent of respondents said they would like more consultation with their fund manager on issues that are meaningful to investors.
In terms of information that respondents would like to see from their pension funds, ESG considerations also came to the forefront in emerging markets.
A total of 52 per cent of respondents in Brazil and 43 per cent in South Africa said it would be helpful if their pension funds sent them information on how companies in their funds dealt with ESG issues such as climate change.
One could speculate on why there were certain results in certain countries. It could be argued, for instance, that child labour is a more visible issue in Brazil and South Africa, which perhaps explains the greater levels of concern.
When it comes to engagement with pension funds, perhaps both managers and beneficiaries in the UK and other developed countries have become too complacent about their relationships.
But one thing is certain – managers must not underestimate the power of individual investors when it comes to responsible investment.
Rather, managers worldwide should be reaching out to investors and addressing their concerns.
Fiona Reynolds is managing director of Principles for Responsible Investment
